For parents, the ABCs of college finance

If he or she is going to college this fall, you probably are feeling sick at the sight of the sticker price. After all, very few people can figure out how to come up with $20,000 to $60,000 a year on a moment's notice. But parents can usually cut the nightmarish costs if they know how to navigate the esoteric world of college finance well. Parents who master it long before their child's senior year in high school are in the best shape because options dwindle as students enter their junior year.

But some options remain at any stage. Here's what's possible.

On the way to college in the fall

While parents are busy raising children and trying to put food on the table, saving gets bypassed, and suddenly parents find themselves looking at college prices in horror as their children are starting college.

Unfortunately, awareness hits when it's too late to save enough and deadlines for most scholarships and some financial aid strategies have passed.

But quick action can still help. Panicky parents should focus now on making the most of the Free Application for Federal Student Aid (FAFSA), the form required to apply for financial aid.

Realize that it is not as simple as it appears on the surface, and spending time figuring out the quirky formula that financial aid offices will use to interpret it can sometimes save families thousands of dollars on college.

"Schools will tell you to just fill it out, but parents are just gambling if they don't understand the logic behind every line," said Kalman Chany, financial aid consultant and author of "Paying for College Without Going Broke" (Princeton Review, $20) "They are risking money that would cover a Bentley."

Chany's book explains strategies for winning aid and helps people avoid common mistakes that undermine their chances to win grants or find free money that doesn't have to be repaid and isn't taxed.

For example, high incomes can reduce aid. So some people try to whittle down incomes incorrectly. Chany says people who under-report income can inadvertently fail to show the expenses they incur paying Social Security and Medicare taxes — a calculation derived in the FAFSA simply from income that's reported. As a result, a family with seemingly low expenses could lose aid.

Failing to report an adult child who has had to move back into the home could also reduce aid. Another common mistake: People report 401(k) savings as investments or use 401(k) money for college. Typically, families are not expected to use retirement savings for college, and shouldn't. They need it for retirement.

So filling out the FAFSA blindly is a mistake — but getting that form done quickly is important. Many colleges have deadlines and provide grants on a first-come, first-served basis. Private colleges may also require an additional form called the PROFILE. So estimate your taxes, submit forms on time and send your tax returns later.

Also, you can still hunt for scholarships at fastweb.com, said Mark Kantrowitz, publisher of Fastweb and author of "Secrets to Winning a Scholarship," scheduled for release in early February. Although most deadlines have passed, some $10,000 contests still remain, such as GoDaddy.com's essay on how the Internet has helped you with your studies.

Junior or sophomore years

The ideal time to start thinking about college is before your child is a sophomore in high school — especially if the student has special talents or is involved in community service. Many scholarship deadlines hit early in sophomore and junior years, and some awards exceed $10,000. An Intel award is for $100,000. Discover Card rewards community service with $25,000, and some are for students with average grades.

Attentive parents start searching for opportunities as early as elementary school. For example, 6- to 12-year-olds could win $25,000 for a Jif Most Creative Peanut Butter Sandwich. Most important, early in a child's junior year in high school, Chany suggests that parents calculate whether a student might qualify for financial aid grants; not just loans. Use both the institutional and federal calculators at apps.collegeboard.com/fincalc/efc_welcome.jsp and realize that once grants are provided, private colleges can be more affordable than public ones. Even incomes up to $180,000 may qualify at some private colleges, while cutoffs at public colleges can be under $70,000.

If a family calculates that it likely will qualify for grants, it should be careful about doing anything that could interfere. For example, parents often sell stocks, bonds, real estate or mutual funds during the college years to pay for college. But doing so raises income from capital gains and can reduce grants — even after the money's been spent paying for college. A better approach can be to sell investments before Christmas in a child's junior year of high school and save the money for college. Why then? Anything you do financially after New Year's Day in your child's junior year will go into tax returns you submit with financial aid forms.

Another key move: Have children spend down Uniform Gifts to Minors Act and Uniform Transfers to Minors Act accounts, because money in children's names will poison financial aid eligibility.

Further, as your child enters his or her senior year, he or she should apply to multiple colleges to enhance the chances of winning scholarships and grants. Some colleges try to recruit students with SAT and ACT scores that are higher than their average by offering money. Higher scores lift the school's reputation. But you have more to offer than high scores. Simply applying to a college in a distant state can give you an edge. Colleges seek geographic, racial, ethnic and talent diversity. If you get a good offer from one school, you can sometimes use it to negotiate more financial aid from your top-choice school.